TAKE ONE: At Next Fed Meeting, Watch the Moving Dots
Federal Reserve officials go into their pre-meeting blackout period today, which means no more public comments until after their March 18-19 policy meeting. Getting a few more comments in just under the wire, Chicago Fed president Charles Evans on Monday seconded New York Fed president William Dudley and said it was getting near time for the central bank to rewrite its guidance on the outlook for interest rates.

Mr. Evans said the Fed will need to scrap its focus on the unemployment rate as a guidepost for rate decisions and instead move toward more “qualitative” guidance to the public about when the Fed might start raising short-term interest rates. Put another way, the Fed seems to be moving toward broad and somewhat vague assurances of low rates, and not the kind of clear guidelines associated with its earlier focus on the level of the jobless rate.

Of course, investors crave certitude and clarity, not vague and qualitative. That’s why analysts are turning increased attention to the Fed’s Summary of Economic Projections. It lays out in cold, hard bar charts and scatter plots the projections that Fed officials make about interest rates. A move toward qualitative guidance about rates will make the dots in these charts “even more important for the markets,” Goldman Sachs analyst Jan Hatzius said in a note to clients Monday.

At its December policy meeting, 12 of 17 officials saw rate increases starting in 2015. Ten of 17 officials saw rates at 0.75% or lower by the end of 2015 and most saw rates below 2% by the end of 2016. Want to know when the Fed will raise rates and how aggressively? Keep an eye on where those dots move on March 19. They aren’t a telltale sign, but they could be the best indicator available.

TAKE TWO: One Bank With Two Views on Wage Inflation
Torsten Slok, a Deutsche Bank analyst, says a 2.5% increase in hourly earnings of production and nonsupervisory workers in February from 12 months earlier was a sign wage pressures are building in the U.S. economy. Joseph Lavorgna, a Deutsche Bank analyst, says that’s not the case.

Mr. Slok is the chief international economist for Deutsche Bank Securities. Mr. Lavorgna (pronounced ‘Lavornya’) is Deutsche Bank’s chief U.S. economist. The disagreement shines a light on an important debate. Muted wage growth and labor costs are big factors keeping interest rates low.

If Mr. Slok is right, pressure could build on the Fed to raise interest rates sooner than investors expect. He says the 2.5% wage measure – released with Friday’s jobs report — is a leading indicator of inflation. “The trend increase in wages that we have seen over the past 12 months tells us that the business cycle is turning up and price pressures are starting to build in the economy,” Mr. Slok said in a note to clients Monday.

Mr. Lavorgna says the wage number was distorted in February by bad weather, which cut worker hours but not their weekly pay. “As weather effects dissipate, the growth in average hourly earnings is likely to slow,” he said.

Goldman Sachs economists are siding with Mr. Lavorgna. They said they would “heavily discount” the February wage uptick. Fed officials right now don’t sound very concerned about wage inflation, either. But stay tuned on this debate. It too could help point the way on rates.
Mr. Slok and Mr. Lavorgna didn’t respond to requests for comment.

- By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

WSJ Interview: ECB’s Lautenschläger Open to Negative Rates, Asset Purchases. European Central Bank Executive board member Sabine Lautenschläger dismissed criticism that the ECB is doing too little about the risks of low inflation, saying the central bank has tools including negative interest rates and asset purchases that it can deploy. “We have room left to act. The deposit rate could be negative, for example,” she said in an interview with The Wall Street Journal, her first since joining the central bank’s executive board in January. “I reject it if someone says we are complacent.” http://on.wsj.com/1ndpoAm

BOJ Stands Pat on Policy, Warns on Exports. The Bank of Japan kept its monetary policy on hold Tuesday, sticking to the view that the economy can withstand the likely headwinds from a looming sales tax increase, but downgraded its optimism over exports. http://on.wsj.com/1cQOkUs

Fed’s Evans: Time to Revise Forward Guidance. The Fed official who was instrumental in guiding the central bank to provide detailed verbal guidance on the potential timing of interest rate increases says the time has arrived to change this system. Chicago Fed President Charles Evans said Monday “there’s not a large expectation” the current system of numerical thresholds will remain in place for much longer. The Fed is likely to replace it with more “qualitative” guidance, he said in a speech. http://on.wsj.com/1oGaOwS

Fed May Have to Accelerate Taper, Says Plosser. The Fed may have to reduce its monthly bond purchases more quickly because of the U.S. economic pickup and the improving forecast for the near future, Philadelphia Fed President Charles Plosser said. “We must back away from increasing the degree of policy accommodation in a manner commensurate with an improving economy,” Mr. Plosser told a panel in Paris. “Reducing the pace of asset purchases in measured steps is moving in the right direction, but the pace may leave us well behind the curve if the economy continues to play out according to the [Fed] forecasts.” http://on.wsj.com/1ispJbV

New York Fed Unveils New Tools To Gauge Labor Market Health. Fed officials have for some time argued that when they take stock of the labor market, they do so based on a broad array of measurements that go beyond the unemployment rate alone. The New York Fed on Monday launched a new effort to put that type of analysis into more concrete terms. The organization said that it’s now offering a charting tool that captures developments in the job market broadly. http://on.wsj.com/1gld8Vu

Senate Could Confirm Fed’s Raskin to Treasury This Week. The Senate is expected to vote this week, possibly as soon as Wednesday, on the nomination of Fed Gov. Sarah Bloom Raskin to the No. 2 spot at the Treasury Department, according to senior Democratic aides. Her confirmation would open up a seat on the Fed Board of Governors. http://on.wsj.com/1fQSGRh

N.Y. Fed: Consumers See Faster Inflation, Slower Home-Price Gains. U.S. consumers see a small acceleration in inflation over the next year, according to a survey released Monday. The Survey of Consumer Expectations from February done by the New York Fed shows consumers think the inflation rate will rise to 3.09% on the one-year horizon, up from expectations in January of 3.0%. The median inflation expectations for the next three years edged up to 3.18% from 3.05% a month earlier. http://on.wsj.com/1qpWXOL

BOE’s Bean: Sterling Rise Will Hit Exports. A further increase in the value of the pound would hurt British exports, denting hopes for a much-needed rebalancing of the economy towards overseas trade and away from domestic spending, a senior Bank of England official said Monday. Charles Bean, the U.K. central bank’s deputy governor for monetary policy, said in a speech in northern England that sterling has risen 10% against the currencies of the U.K.’s main trading partners in the past year and any further increase would be undesirable. http://on.wsj.com/NT7wuS

BOE’s Carney to be Grilled on FX Probe. The BOE faces Treasury Select Committee questioning at noon GMT Tuesday about its role in the foreign exchange markets. The central bank has suspended one staffer in connection with the long-running global investigation into the guts of the foreign exchange market. The central bank said it has found “no evidence” that its staff “colluded in any way in manipulating the foreign-exchange market or in sharing client information.” Here is your cheat sheet for this event: http://on.wsj.com/1kHzvvp

Cyprus Central Bank Chief Resigns. Cyprus’s central-bank Governor Panicos Demetriades sent his resignation letter to the country’s president, several officials with knowledge of the situation said Monday. Mr. Demetriades has had a tumultuous relationship with his country’s government. Both the president and the finance minister have criticized him over the handling of Cyprus’s banking crisis last year. The crisis culminated in a €10 billion bailout financed by the euro area and the International Monetary Fund that saw the island’s oversize banking sector overhauled. http://on.wsj.com/1ekVZLf

Bundesbank Criticizes Fed’s Bank Rules. An official of the Deutsche Bundesbank has criticized new Fed rules designed to strengthen the capital position of European banks operating in the U.S., but which some European bankers claim are unfair. In comments prepared for a speech in Berlin Monday, Andreas Dombret said that recent U.S. regulatory initiatives, “such as the enhanced standards for bank holding companies and foreign banking organizations, worry me. They seem to contradict the need for international cooperation.” http://on.wsj.com/NT2M8D

Top German Economist Calls for ECB to Act. A leading German institute has called for full-blown quantitative easing by the ECB to head off a deflation spiral, marking a radical shift in thinking among the German policy elites. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, demanded €60bn (£50bn) of bond purchases each month to halt the contraction of credit and avert a Japanese-style deflation trap. http://bit.ly/1i5JqIt

EU Ministers Optimistic Over Deal on Bank-Rescue System. Euro-zone finance ministers expressed optimism on Monday that they could strike a deal with European lawmakers on a single authority to wind down failing banks before European elections in May. But negotiations over the shape of a planned single resolution mechanism looked set to be complicated by continued disagreements over how to finance the system, and a Finnish vote that limits that country’s room for maneuver in the talks. http://on.wsj.com/1elDHJK

China Expects Full Interest-Rate Liberalization Within 2 Years. China’s central bank chief, Zhou Xiaochuan, said he expects to see full liberalization of domestic interest rates, a key step in the nation’s ambitious financial reforms, in a year or two. http://on.wsj.com/1enHWof

China Central Bank Focused on Yuan’s Medium-Term Trend, Chief Says. The governor of the People’s Bank of China said the central bank is focusing on the medium-term trend of the yuan, suggesting it didn’t need to react to short-term developments. http://on.wsj.com/1ltKtlB

Fed Taper Effect Mostly Passed, Brazil Central Banker Says. “The biggest impact of the impact of [Fed] tapering was already priced in last year,” Aldo Mendes, the central bank’s monetary policy director told The Wall Street Journal in an interview. He also said the central bank hasn’t yet decided how many of the forex swap contracts that expire on Apr. 1 it will offer to roll over. http://on.wsj.com/1fQHCnl

Bank of Israel Members See Stronger Shekel Threatening Exports. The Bank of Israel warned that a further appreciation of the shekel could slow a recovery in exports, a signal that it may once again intervene in the foreign exchange markets to weaken the currency. http://on.wsj.com/N39Zll

Philippine Central Bank: Strong Liquidity Growth Not Fueling Inflation. The strong growth in domestic liquidity in the Philippines in recent months can be absorbed by the economy and shouldn’t drive inflation higher in the months ahead, the central bank said Tuesday–Dow Jones Newswires.

GRAPHIC CONTENT
Shorter Workweek a Drag on Incomes. Add weekly paychecks to the list of victims of this unrelenting winter. According to the Friday’s employment report, seasonally adjusted weekly pay over the past three months has lost a bit of ground compared to the average of the previous three months. Compared to a year ago, February’s weekly paychecks are up just 1.3%, the slowest advance in four years. http://on.wsj.com/1nBnR3W

RESEARCH
A New York Fed paper looks at the role of balance of payments adjustments in the euro zone crisis. “Countries in the euro area periphery borrowed heavily from abroad in the years leading up to the sovereign debt crisis, largely to finance increased consumption and housing investment. When the crisis hit in 2010, capital flight by private investors forced these countries to bring domestic spending back into line with domestic incomes—the same adjustment required of countries facing a typical balance of payments crisis.” However, the research finds that the region’s Target2 payment mechanism made the adjustment less severe than it might have been.http://www.newyorkfed.org/research/current_issues/ci20-2.pdf

- Australian business conditions deteriorated markedly in February, unwinding previous optimism that the resource-rich economy was recovering from a slowdown in mining investment. http://on.wsj.com/1nEU4XY

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